-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kqs1IoBrjRBC0v/iMhzWyxdrz0n+d5+Czw/EAhZZbzPML8HveurvTA5Jec6vmnBU EbEetp0K2SXQHmDmpE4yVQ== 0000887356-99-000023.txt : 19991215 0000887356-99-000023.hdr.sgml : 19991215 ACCESSION NUMBER: 0000887356-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRADLEES INC CENTRAL INDEX KEY: 0000887356 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 043156108 STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11134 FILM NUMBER: 99774283 BUSINESS ADDRESS: STREET 1: 1 BRADLESS CIRCLE STREET 2: P O BOX 9051 CITY: BRAINTREE STATE: MA ZIP: 02184 BUSINESS PHONE: 7813803000 MAIL ADDRESS: STREET 1: ONE BRADLEES CIRCLE STREET 2: P O BOX 9051 CITY: BRAINTREE STATE: MA ZIP: 02184 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 30, 1999 Commission file Number 1-11134 BRADLEES, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3156108 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Bradlees Circle Braintree, MA 02184 (Address of principal executive offices) (Zip Code) (781) 380-3000 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of the issuer's common stock outstanding as of December 7, 1999: 9,780,347 shares. Exhibit Index on Page 25 Page 1 of 34 (Including Exhibits) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Bradlees, Inc.: We have reviewed the accompanying condensed consolidated balance sheets of Bradlees, Inc. and subsidiaries (the "Company") as of October 30, 1999 and October 31, 1998, and the related condensed consolidated statements of operations and cash flows, for the thirteen and thirty-nine week periods then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. On February 2, 1999, the Company emerged from bankruptcy. As discussed in Notes 1 and 2 to the condensed consolidated financial statements, effective January 30, 1999, the Company accounted for the reorganization and adopted "fresh-start reporting". As a result of the reorganization and adoption of fresh-start reporting, the condensed consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 30, 1999 are not comparable to the condensed consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 31, 1998. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ARTHUR ANDERSEN LLP New York, New York November 17, 1999 BRADLEES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands except per share amount)
13 Weeks Ended --------------- Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- Registrant Predecessor ---------- ----------- Total sales $358,399 | $ 323,106 Leased department sales 11,672 | 10,973 -------- | ------- Net sales 346,727 | 312,133 Cost of goods sold 240,949 | 217,394 -------- | ------- Gross margin 105,778 | 94,739 Leased department and other | operating income 3,451 | 3,185 -------- | -------- 109,229 | 97,924 Selling, store oper., admin. | and distribution expenses 101,734 | 95,706 Depreciation and amort. expense 6,604 | 7,803 Interest and debt expense 7,818 | 4,371 Reorganization items - | (2,749) -------- | ------- Net loss $ (6,927) | $ (7,207) ======== | ======== | Comprehensive loss $ (6,927) | $ (7,207) ======== | ======== Basic and diluted net loss per | share $ (0.69) | $ (0.64) ======== | ======== | Weighted average shares 9,986 | 11,310 ======== ======== See accompanying notes to condensed consolidated financial statements.
BRADLEES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands except per share)
39 Weeks Ended -------------- Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- Registrant Predecessor ---------- ----------- Total sales $1,065,173 | $ 939,203 Leased department sales 35,474 | 32,818 --------- | -------- Net sales 1,029,699 | 906,385 Cost of goods sold 717,247 | 635,383 --------- | ------- Gross margin 312,452 | 271,002 Leased department and other | operating income 10,095 | 9,286 -------- | -------- 322,547 | 280,288 Selling, store oper., admin. | and distribution expenses 307,558 | 280,854 Depreciation and amortization | expenses 21,132 | 24,371 Loss on dispos. of properties - | 241 Interest and debt expense 21,819 | 11,960 Reorganization items (778) | (2,555) -------- | -------- Net loss $(27,184) | $ (34,583) ======== | ======== | Comprehensive loss $(27,184) | $ (34,583) ======== | ======== Basic and diluted net loss per | share $ (2.73) | $ (3.06) ======== | ======== Weighted average shares 9,959 | 11,310 ======== | ======== See accompanying notes to condensed consolidated financial statements.
BRADLEES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
Oct. 30, 1999 Jan. 30,1999 Oct. 31,1998 ------------- ------------ ------------ Registrant Registrant Predecessor ---------- ---------- ----------- ASSETS Current assets: | Unrestricted cash and cash | equivalents $ 11,228 $ 9,485 | $10,959 Restricted cash and cash | equivalents - - | 25,129 ------- -------- | ------- Total cash and cash equiv. 11,228 9,485 | 36,088 ------- -------- | ------- Accounts receivable 11,895 13,015 | 11,925 Inventories 323,495 232,343 | 318,883 Prepaid expenses 11,218 8,967 | 11,031 ------- -------- | ------- Total current assets 357,836 263,810 | 377,927 ------- -------- | ------- Prop., plant and equip.,net: | Property excluding capital | leases, net 93,475 93,039 | 123,892 Property under capital | leases, net 22,786 10,347 | 17,732 ------- -------- | ------- Total property, plant and | equipment, net 116,261 103,386 | 141,624 ------- -------- | ------- | Other long-term assets: | Lease interests, net 72,518 75,833 | 137,350 Assets held for sale - 14,000 | - Other long-term assets,net 7,122 6,722 | 4,509 ------- -------- | ------- Total other assets 79,640 96,555 | 141,859 ------- -------- | ------- Total assets $ 553,737 $ 463,751 | $661,410 ======= ======== | =======
(Continued) BRADLEES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
Oct. 30, 1999 Jan. 30, 1999 Oct. 31, 1998 ------------- ------------- ------------- Registrant Registrant Predecessor LIABILITIES AND ---------- ---------- ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: | Accounts payable $ 201,120 $ 119,302 | $ 179,413 Accrued expenses 19,597 29,326 | 23,221 Self-insurance reserves 5,798 6,462 | 6,027 Short-term debt 158,159 114,449 | 157,392 Current portion of capital | lease oblig. and notes 2,540 2,089 | 1,038 ------- ------- | ------- Total current liabilities 387,214 271,628 | 367,091 ------- ------- | ------- Long-term liabilities: | Obligations under capital | leases 27,089 25,284 | 26,211 Lease financing obligation 17,496 - | - Convertible notes payable 11,976 28,995 | - Deferred income taxes - - | 8,581 Self-insurance reserves 11,773 13,120 | 12,237 Unfavorable lease liability 45,064 44,581 | - Other long-term liabilities 24,592 25,143 | 19,034 ------- ------- | ------- Total long-term | liabilities 137,990 137,123 | 66,063 ------- ------- | ------- | Liab. subject to settlement | under the reorg. case - - | 548,788 | Stockholders' equity (def.): | Common stock(new) 9,986,273 | shs.(10,225,711 at 1/30/99) | Par value 100 102 | - Common stock(old) 11,310,384 | shs. outstanding at 10/31/98 | Par value - - | 115 Additional paid-in-capital 55,617 54,898 | 137,821 Accumulated deficit (27,184) - | (457,665) Treasury stock, at cost - - | (803) ------- ------- | -------- Total stockholders' equity | (deficiency) 28,533 55,000 | (320,532) ------- ------- | -------- Total liab. and stockholders' | equity (deficiency) $ 553,737 $ 463,751 | $ 661,410 ======= ======= | ========
See accompanying notes to condensed consolidated financial statements. BRADLEES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
39 Weeks Ended Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- Registrant Predecessor ---------- ----------- Cash flows from oper. activities: Net loss $ (27,184) | $ (34,583) Adjustments to reconcile net loss | to cash provided (used) by | operating activities: | Depreciation and amortization | expense 21,132 | 24,371 Amortization of lease interests | and unfavorable lease liability, | net 3,798 | - Amortization of deferred financing | costs 1,088 | 1,215 Reorganization items (778) | (2,555) Changes in working capital and | other, net (10,749) | (37,232) ------- | ------- Net cash used by oper. activities | before reorganization items (12,693) | (48,784) ------- | ------- ------- | ------- Reorganization items: | Interest income received - | 746 Chapter 11 prof. fees paid (8,130) | (7,786) Other reorg. expenses paid, net (1,781) | (3,225) ------- | ------- Net cash used by reorg. items (9,911) | (10,265) ------- | ------- Net cash used by oper. activities (22,604) | (59,049) Cash flows from investing activ.: | Capital expenditures, net (17,055) | (10,379) Lease acquisition costs (1,250) | - Increase in restricted cash | and cash equivalents - | (8,369) ------- | ------- Net cash used in invest. activ. (18,305) | (18,748) ------- | ------- Cash flows from financing activ.: | Payments of convertible notes (17,019) | - Pymts of liab. subject to settle. - | (6,551) Net borrowings under the | revolver/DIP facility 43,709 | 73,184 Proceeds from sales of properties - | 12,036 Proceeds from lease financing 17,500 | - Deferred financing costs (181) | - Proceeds rec. upon exer. of warrants 540 | - Principal payments on notes and | capital lease obligations (1,897) | (862) ------- | ------- Net cash provided by fin. activ. 42,652 | 77,807 ------- | ------- Net increase in unrestricted cash | and cash equivalents 1,743 | 10 Unrestricted cash and cash equiv.: | Beginning of period 9,485 | 10,949 ------- | ------- End of period $ 11,228 | $ 10,959 ======= | ======= Supplemental disclosure of cash flow information: Cash paid for interest and certain debt fees $ 12,815 | $ 10,282 Cash paid for income taxes $ - | $ 279 Supplemental schedule of noncash | (investing and financing) activ.: | Capital lease oblig. incurred $ 2,883 | $ _ Reduction of liab. subj. to sett. | due to trsf. of title to prop. $ - | $ 2,000 See accompanying notes to condensed consolidated financial statements.
BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company") operate in the discount department store retail segment in the Northeast United States. The Company emerged from Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on February 2, 1999 (the "Effective Date"). The Company had filed petitions for relief under Chapter 11 on June 23, 1995 (the "Filing"). While in Chapter 11, the Company (the "Predecessor") operated its business as a debtor-in-possession subject to the jurisdiction of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The reorganized Company (the "Registrant") adopted fresh-start reporting and gave effect to its emergence as of its fiscal 1998 year-end (January 30, 1999). Under fresh-start reporting, the final consolidated balance sheet as of January 30, 1999 became the opening consolidated balance sheet of the reorganized Company. Since fresh-start reporting has been reflected in the accompanying condensed financial statements as of October 30, 1999 and for the interim periods then ended, those statements are not comparable in certain material respects to the condensed consolidated financial statements as of October 31, 1998 and for the interim periods then ended. Accordingly, a black line has been drawn between the Registrant's financial statements and the Predecessor's financial statements. With respect to the unaudited condensed consolidated financial statements for the 13 weeks (third quarter) and 39 weeks (year-to-date) ended October 30, 1999 and October 31, 1998, it is the Company's opinion that all necessary adjustments (consisting of normal and recurring adjustments) have been included to present a fair statement of results for the interim periods. Certain prior-year amounts have been reclassified to conform to this year's presentation. Basic and diluted shares outstanding and the basic and diluted loss per share were the same for both the 13 weeks and 39 weeks ended October 30, 1999 because the inclusion of common stock equivalents (which included warrants and stock options in the second quarter) would have reduced the reported loss per share. The Registrant's shares presented in its financial statements presume full issuance of new Bradlees Common Stock, including the latest estimate of shares to be issued for claims not yet fully resolved, in accordance with the Company's plan of reorganization (the "Plan") confirmed by the Bankruptcy Court on January 27, 1999 plus shares issued upon exercise of warrants through October 30, 1999. These statements should be read in conjunction with the Company's financial statements (Form 10-K) for the fiscal year ended January 30, 1999 ("1998"). Due to the seasonal nature of the Company's business, operating results for this year's interim periods presented are not necessarily indicative of results that may be expected for the fiscal year ending January 29, 2000 ("1999"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the general rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). 2. REORGANIZATION CASE AND FRESH-START REPORTING The Plan contained distributable value to creditors of approximately $162 million (as of the Effective Date) which consisted of approximately $15 million of administrative claim payments (including $4.5 million of professional fees accrued at January 30, 1999 and paid subsequent to the Effective Date); $14 million of cash distributions to the pre-Chapter 11 bank group and the unsecured creditors; a $40 million note primarily payable to the pre-Chapter 11 bank group, which was immediately paid down on the Effective Date by approximately $11 million from the proceeds of the modification of the lease terms of the Union Square, NY store; certain notes totaling $6.2 million; other distributions totaling $1.4 million; approximately 10 million shares of new Bradlees Common Stock with an estimated value as of the Effective Date of $85 million; and warrants allowing for the purchase of 1 million shares of Common Stock, exercisable at $7.00 per share and expiring February 2, 2004. The Plan was consummated on February 2, 1999 and Bradlees emerged from Chapter 11. Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", the Company adopted fresh-start reporting and reflected the consummation distributions in the consolidated balance sheet as of January 30, 1999 to give effect to the reorganization as of year-end. Under fresh-start reporting, the reorganization value of the Company was allocated to the emerging Company's net assets on the basis of the purchase method of accounting. Subsequent to the filing of the Company's Disclosure Statement and occurrence of the Effective Date, a number of events occurred which impacted the determination of equity value under fresh-start reporting, including but not limited to, the initial low trading prices of the new stock, information regarding the Company's fourth quarter 1998 performance and final 1999 financial plan, a settlement with a landlord regarding the disposition of the Union Square, NY leasehold interest and the liquidation of Caldor Corp., a major competitor of the Company. The Company employed a similar valuation method under fresh-start reporting to determine its equity value to that utilized by its independent financial advisor in the Disclosure Statement and arrived at an estimated equity value of $55 million. During the Chapter 11 case, the Company received Bankruptcy Court approval to make certain adequate protection payments to the pre-petition bank group. Contractual interest expense not recorded on certain pre-petition debt totaled approximately $7.7 and $23.1 million for the third quarter and first three quarters of 1998, respectively. 3. RESTRICTED CASH AND CASH EQUIVALENTS Restricted cash and cash equivalents at October 31, 1998 represented certain funds received by the Company during the Chapter 11 case that were required to be restricted. These funds were utilized on the Effective Date for the consummation payments. 4. DEBT FINANCING FACILITY Prior to the Effective Date, the Company had a $250 million financing facility (the "Financing Facility") (of which $125 million was available for issuance of letters of credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent, under which the Company was allowed to borrow for general corporate purposes, working capital and inventory purchases. The Financing Facility consisted of (a) an up to eighteen-month debtor-in-possession revolving credit facility in the maximum principal amount of $250 million (the "DIP Facility") and, subject to meeting certain conditions, (b) an up to three-year post-emergence credit facility in the maximum principal amount of $250 million (as modified, the "Revolver" - see below). The outstanding amount under the DIP Facility was repaid on the Effective Date with proceeds from the Revolver. The Revolver is scheduled to expire on December 23, 2001. Trade and standby letters of credit outstanding under the Revolver were $7.1 and $21.5 million, respectively, as of October 30, 1999. Trade and standby letters of credit outstanding under the DIP Facility were $8.5 and $19.3 million, respectively, as of October 31, 1998. REVOLVER The Revolver consists of a $250 million senior secured revolving line of credit (of which $125 million is available for issuance of letters of credit) and a $20 million junior secured "last in-last out" facility. The Company expects to use the Revolver primarily for working capital and general business needs. The senior secured tranche has an advance rate equal to 80% of the Loan Value of Eligible Receivables (as defined), plus generally 72% of the Loan Value of Eligible Inventory (as defined), subject to certain adjustments. Between March 1 and December 15, the inventory advance rate will be increased to 77% of the Loan Value of Eligible Inventory provided that the total amount of all senior secured advances does not exceed 85% of the Loan to Value Ratio (as defined). The Company may also borrow up to an additional $20 million under the junior secured facility provided that the total borrowings (senior secured and junior secured) do not exceed 93% of the Loan to Value Ratio. The Revolver permits the Company to borrow funds under the senior secured tranche at an interest rate per annum equal to (a) the higher of (i) the annual rate of interest as announced by BankBoston as its "Base Rate" and (ii) the weighted average of the rates on overnight federal funds plus 0.50% per annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus the percentage established by the Federal Reserve as the maximum rate for all reserves applicable to any member bank of the Federal Reserve system in respect of eurocurrency liabilities. Each of these rates is subject to a 0.50% increase in the event of overadvances. The junior secured facility permits the Company to borrow funds at the "Base Rate" plus 7.00% per annum. The Revolver is secured by substantially all of the non-real estate assets of the Company. The Revolver contains financial covenants including (i) minimum rolling twelve-month EBITDA at the end of each quarter, (ii) minimum monthly accounts payable to inventory ratios; (iii) maximum annual capital expenditures; and (iv) minimum operating cash flow to interest expense ratios (for the fiscal quarters ending on or about January 31, 2001, and thereafter). The Company is in compliance with the Revolver covenants. LEASE FINANCING OBLIGATION In July, 1999, New Horizons of Yonkers, Inc. ("New Horizons"), a subsidiary of Bradlees Stores, Inc. (Note 9), and 2500 CPA Associates, LLC ("CPA") entered into an agreement for the financing of New Horizon's leasehold interest in the Yonkers, NY store (the "Lease Financing Obligation"). Under this agreement, New Horizons received $17.5 million in exchange for the assignment of its leasehold interest to CPA and annual incremental payments of $2.6 million (including interest at an effective rate of 14.8%) under a sublease with CPA for a term of 35 years, including option periods. The Yonkers store continues to operate as a Bradlees store and the net proceeds (after certain fees) of $17.2 million were used to pay down $17.0 million of the Notes (see below) and $0.2 million of associated accrued interest. The Lease Financing Obligation is secured by (i) the leasehold interest in the Yonkers store, (ii) first priority liens on leasehold interests in three other named stores, as well as any net proceeds received upon any disposition(s) of such interests, and (iii) a standby letter of credit of $1.1 million. In addition, as a result of the lease financing transaction, the underlying Yonkers operating lease was converted to a capital lease with a $2.9 million obligation and associated capital lease asset. Also, the prior assets held for sale of $14 million for Yonkers (Note 7) were reclassified, with $3.4 million (representing the net book value of the store equipment and leasehold improvements) added to property excluding capital leases, net and $10.6 million (representing the remaining incremental lease value previously determined under fresh-start reporting) added to property under capital leases, net. 9% CONVERTIBLE NOTES The 9% Convertible Notes (the "Notes") were issued by Bradlees Stores, Inc. Each Note will mature on February 3, 2004 and bears interest at the rate of 9% per annum from the date of issuance, payable semi-annually in arrears on January 1 and July 1 of each year, commencing July 1, 1999. The aggregate principal amount of the Notes outstanding as of October 30, 1999 was $12 million (which reflects the $17 million aggregate principal paydown in July discussed above and the $11 million aggregate principal amount that was pre-paid on the Effective Date). The Company has the right to redeem the Notes at any time, in whole or in part, subject to certain availability levels under the Revolver, by paying the holder the unpaid principal plus accrued and unpaid interest. The Company obtained an option to repurchase $9 million of the Notes at a discount (see below). The remaining outstanding Notes are secured by first priority liens on leasehold interests in three named stores (the "Collateral"), as well as any net proceeds received upon any disposition(s) of such interests. During the third quarter, the Company entered into a supplemental agreement with the holders of approximately $9.0 million, or approximately 75%, of the $12.0 million of the outstanding Notes (the "Discount Option Noteholders"). Under the agreement, the Company can repurchase (and currently expects to do so in December, 1999) the outstanding Notes held by the Discount Option Noteholders (the "Discount Option Notes") at a purchase price equal to 86% of the outstanding principal amount (i.e. a 14% discount, plus accrued interest, exercisable for a one-month period from December 1, 1999 through December 31, 1999 (the "Discount Option"). Each month thereafter the discount will decrease by 1% such that the discount will be fully eliminated by January 31, 2001. In consideration of the Discount Option, the Company agreed to pay the Discount Option Noteholders a premium on the closing date of the grant of the option equal to 0.5% of the outstanding principal amount of the Discount Option Notes, grant the Discount Option Noteholders second priority leasehold mortgages on the Collateral subject to substitution in certain circumstances, and provide a put option exercisable on or after February 3, 2003 to sell the Discount Option Notes to the Company at a price equal to the then outstanding principal amount of the Discount Option Notes, plus accrued interest. In accordance with applicable SEC rules, the Company had offered to enter into the supplemental agreement with all Noteholders and closed the offer on August 5, 1999. The first priority liens on the Collateral secure indebtedness under the Notes equal to the sum of $6.5 million plus an amount from time to time equal to the amount of interest that would accrue on $6.5 million of principal amount of outstanding Notes from February 2, 1999 to the date of calculation of the extent of such lien. The Notes are convertible any time after the first anniversary of the Effective Date into shares of the Company's Common Stock. The conversion price will initially be the unweighted average closing price of the Common Stock during the twenty business days preceding the first anniversary of the Effective Date. 5. INCOME TAXES The Company provides for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". On an interim basis, the Company provides for income taxes using the estimated annual effective rate method. The Company did not recognize a quarterly or annual income tax expense or benefit in 1998 and also does not expect to recognize a quarterly or annual income tax expense or benefit in 1999. 6. REORGANIZATION ITEMS The Company provided for or incurred the following expense and income items during the third quarter and year-to-date periods of 1999 and 1998, directly associated with the Chapter 11 reorganization proceedings and the resulting restructuring of its operations: (000's) ----------------------------------------- 13 Weeks Ended 39 Weeks Ended 10/30/99 10/31/98 10/30/99 10/31/98
-------- -------- -------- -------- Professional fees $ - $2,250 $ - $6,750 Interest income - (274) - (746) Provision for occupancy and other store closing costs - - (778) - Net asset write-off - - - 470 Gain on disposition of properties - - - (1,873) Provision for rejected leases - (4,725) - (7,156) ------ ----- ----- ------ $ - $(2,749) $(778) $(2,555) ====== ====== ===== ======
PROFESSIONAL FEES AND INTEREST INCOME: Professional fees represented estimates of expenses incurred, primarily for legal, consulting and accounting services provided to the Company and the creditors committee (which were required to be paid by the Company while in Chapter 11). Interest income represented interest earned on cash invested during the Chapter 11 proceeding. PROVISION FOR OCCUPANCY AND OTHER STORE CLOSING COSTS AND NET ASSET WRITE-OFF: The Company entered into a lease financing transaction (Note 4) which allowed its Yonkers, NY store to continue in operation, resulting in the reversal of reserves totaling $0.8 million in July, 1999 that had been established for the expected store closing costs. The Company incurred a $0.5 million net asset write-off in the second quarter of 1998 relating to the disposal of greeting card fixtures that were replaced as a consequence of the Company's rejection of its greeting card supply contract. GAIN ON DISPOSITION OF PROPERTIES AND PROVISION FOR REJECTED LEASES: The Company sold a previously closed store in the second quarter of 1998 and recognized a gain of $1.9 million. During the third quarter of 1998, the Company obtained confirmation that the lessor of a previously rejected lease had re-let the premises and, accordingly, the Company reduced its liability for rejected leases by $4.7 million and recognized a reorganization credit for that amount. During the second quarter of 1998, the Company was notified by two of its former landlords at closed locations that the properties had been re-let and therefore their claims for rejected lease damages were reduced by $2.4 million. RESTRUCTURING RESERVES: As of October 30, 1999, the Company had remaining reserves totaling approximately $3.2 million for costs associated with the prior closing and planned closing of stores and other restructuring activities. Approximately $1.8 million of restructuring costs were paid in the first three quarters of 1999. The majority of the remaining reserved costs are expected to be paid within a year. 7. ASSETS HELD FOR SALE Assets held for sale at January 30, 1999 represented the estimated net realizable value (assigned under fresh-start reporting) of the Company's Yonkers, NY store lease. As described in Note 4 under "Lease Financing Obligation" and in Note 6, the Company entered into a lease financing agreement which allowed its Yonkers store to continue in operation and recorded certain reclassifications of the $14 million previously in assets held for sale. 8. POST-RETIREMENT AND STOCK OPTION PLANS The Company provides certain health care and life insurance benefits for certain retired non-union employees meeting age and service requirements. The Company accounts for the post-retirement plan in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions," which requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company's post-retirement benefits are funded on a current basis. Effective January 1, 1998, changes were made to the post-retirement plan that included the elimination of future benefits for active employees who do not become eligible by January 1, 2000, and a phase-out of the Company contributions over two years (at 50% per year beginning January 1, 1999) towards the cost of providing medical benefits to eligible retirees. Under SFAS No. 106, non-recurring amortization credits of $1.3 and $4.0 million were recorded in the third quarter and first three quarters of 1998, respectively, to reflect these changes to the post-retirement plan. As a consequence of the adoption of fresh-start reporting at January 30, 1999 (Note 2), no amortization credit has been recorded in 1999. Pursuant to the Plan, the Company agreed to grant options to purchase 750,000 shares of new Bradlees Common Stock to the Company's senior management. Those options were granted under the Bradlees, Inc. 1999 Stock Option Plan (the "Stock Plan") which allows for the granting of one million options, when their exercise price was determined in April, 1999 and will vest in one-third increments beginning on the date of grant and each of the two anniversaries following the date of grant. These options, of which 24,363 shares were forfeited through October, 1999, are exercisable for a period of five years from the date of grant. Compensation expense related to these options began to be recorded over the vesting period in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock issued to Employees" (intrinsic value method). Through October, 1999, additional options were granted to other members of management to purchase 137,050 shares, of which 8,800 shares were forfeited, of new Bradlees Common Stock at prices equal to the market prices of the Common Stock on the dates of the grants. 9. SUMMARIZED FINANCIAL INFORMATION FOR BRADLEES STORES, INC. AND NEW HORIZONS OF YONKERS, INC. Under the Plan, Bradlees, Inc. issued the new Bradlees Common Stock (Note 2) and Bradlees Stores, Inc. issued the Notes (Note 4). Bradlees, Inc. operates its stores through Bradlees Stores, Inc., a direct wholly-owned subsidiary. Bradlees, Inc. is guaranteeing the Notes issued by Bradlees Stores, Inc. Substantially all of the assets of the Company, on a consolidated basis, are held by Bradlees Stores, Inc. The following summarized financial information of Bradlees Stores, Inc. is presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's) ---------------------------------- Oct. 30, 1999 Oct. 31, 1998 ------------- ------------ Current Assets $357,836 | $371,208 Noncurrent Assets 182,531 | 283,441 Current Liabilities 387,214 | 367,091 Payable to Bradlees, Inc. 55,288 | 189,734 Due to New Horizons of Yonkers, Inc. 7,008 | 1 Noncurrent Liabilities 117,613 | 66,063 Liabilities Subject to | Settlement Under the | Reorganization Case - | 328,557 Stockholders' Deficit $(26,756) | $(296,797)
(000's) ------------------------------------------------------- 13 Wks ended 13 Wks ended 39 Wks ended 39 Wks ended Oct.30, 1999 Oct.31, 1998 Oct.30, 1999 Oct.31,1998 ------------ ------------ ------------ ----------- Net Sales $346,727 | $312,133 $1,029,699 | $906,385 Gross Margin 105,778 | 94,739 312,452 | 271,002 Loss from Continuing | | Operations (6,896)| (7,313) (26,756)| (34,689) Net Loss $(6,896)| $(7,313) $(26,756)| $(34,689)
New Horizons (Note 4) is the lessee of Bradlees' Yonkers, New York store lease, which it subleases to Bradlees Stores, Inc. New Horizons, which remained in Chapter 11 to facilitate the planned disposition of its leasehold interest, is also fully and unconditionally guaranteeing the Notes issued by Bradlees Stores, Inc. and its plan of reorganization became effective at the time of the disposition. The following summarized financial information of New Horizons is presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's) ------------------------------- Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- Property Under Capital Lease, net $13,370 | $ - Due from Bradlees Stores, Inc. 7,008 | 1 Obligation Under Capital Lease 2,881 | - Lease Financing Obligation 17,496 | - Stockholders' Equity $ 1 | $ 1
(000's) -------------------------------------------------------- 13 Wks ended 13 Wks ended 39 Wks ended 39 Wks ended Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- ------------- ------------- Rental Income $975 | $147 $1269 | $441 Rent Expense 59 | 147 353 | 441 Amortization Expense 112 | - 112 | - Interest Expense 725 | - 804 | - Income from Continuing | | Operations 79 | - - | - Net Income $ 79 | $ - $ - | $ -
10. SUBSEQUENT EVENTS On November 23, 1999, the Company's Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock, par value $.01 per share. The dividend was payable on November 26, 1999 to the stockholders of record on November 26, 1999. The Board adopted the rights plan to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group which acquires 15% or more of Bradlees' outstanding common stock without the approval of the Board. The rights plan should not interfere with any merger or other business combination approved by the Board. The Company also has elected to be governed by Section 50A of Chapter 156B of the General Laws of the Commonwealth of Massachusetts, which, among other things, requires that the Company have a classified Board of Directors. For those interested in the specific terms of the rights plan as made between the Company and BankBoston, N.A., as the Rights Agent, and the Company's election to be governed by Section 50A, reference can be made to the Company's Form 8-K or Form 8-A filed with the SEC on November 30, 1999. On December 3, 1999, the SEC released Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the recognition, presentation, and disclosure of revenue, including layaway sales and the presentation of leased sales, in financial statements filed with the SEC. SAB No. 101 must be applied no later than the first quarter of the fiscal year beginning January 30, 2000. The Company is currently evaluating the impact of SAB No.101 on its financial statements. BRADLEES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations --------------------- Results of operations, summarized in millions of dollars (except per share amounts) and expressed as a percentage of net sales (on next page), were as follows for the 13 weeks and 39 weeks ended Octobe 1999 ("Third Quarter 1999" and "Year-to-Date 1999", respectively) and for the 13 weeks and 39 week ended October 31, 1998 ("Third Quarter 1998" and "Year-to-Date 1998", respectively):
13 Weeks Ended 39 Weeks Ended -------------- -------------- Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- ------------- ------------- Registrant Predecessor Registrant Predecessor ---------- ----------- ---------- ----------- (Dollars in millions except per share amounts) Total sales $ 358.4 | $ 323.1 $ 1,065.2 | $ 939.2 Leased dept. | | sales 11.7 | 11.0 35.5 | 32.8 ------- | ------- ------- | ------ Net sales 346.7 | 312.1 1,029.7 | 906.4 Cost of goods | | sold 240.9 | 217.4 717.2 | 635.4 ------- | ------- ------- | ------ Gross margin 105.8 | 94.7 312.5 | 271.0 Leased dept. | | and other oper. | | income 3.4 | 3.2 10.0 | 9.3 ------- | ------- ------- | ------ 109.2 | 97.9 322.5 | 280.3 Selling, store | | operating, | | administrative & | | distribution | | expenses 101.7 | 95.7 307.6 | 280.9 Depreciation and | | amortization | | expense 6.6 | 7.8 21.1 | 24.4 Loss on dispos. | | of properties - | - - | 0.2 Interest and debt | | expense 7.8 | 4.4 21.8 | 12.0 Reorg. items - | (2.8) (0.8) | (2.6) ------| ------- ------- | ------- Net loss $ (6.9)| $ (7.2) $(27.2) | $(34.6) =======| ======= ======= | ======= Basic & diluted | | net loss per | | share $ (0.69)| $ (0.64) $(2.73) | $(3.06) ========| ======== ======= | ======= Total sales | | increase (decrease) | | All stores 10.9%| -5.6% 13.4% | 0.9% Comparable | | stores 10.5%| -2.0% 14.2% | 4.7% | | Number of stores in | | operation at end of | | period 104 | 103 104 | 103
BRADLEES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (Continued) - ---------------------------------
13 Weeks Ended 39 Weeks Ended Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998 ------------- ------------- ------------- ------------- Registrant Predecessor Registrant Predecessor ------------- ------------- ------------- ------------- As a percentage of net sales, results were as follows: Net sales 100.0%| 100.0% 100.0% | 100.0% Cost of goods | | sold 69.5 | 69.6 69.7 | 70.1 ------ | ------ ------ | ----- Gross margin 30.5 | 30.4 30.3 | 29.9 Leased depart. | | and other | | oper. income 1.0 | 1.0 1.0 | 1.0 ------ | ------ ------ | ----- 31.5 | 31.4 31.3 | 30.9 Selling, store | | operating, | | admin. and | | distribution | | expenses 29.3 | 30.7 29.9 | 31.0 Depreciation & | | amortization | | expense 1.9 | 2.5 2.0 | 2.7 Loss on dispos. | | of properties - | - - | 0.2 Interest & debt | | expense 2.3 | 1.4 2.1 | 1.3 Reorganization | | items - | (0.9) (0.1) | (0.3) ------- | ------- ------- | -------- Net loss (2.0)%| (2.3)% (2.6)%| (3.8)% ========| ======== ========| ========
Certain statements incorporated by reference or made in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When we use the words "anticipate," "assume," "believe," "estimate," "expect," "intend" and other similar expressions in this report, they are generally intended to identify forward-looking statements. In connection, with such forward-looking statements, you should consider that they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to: international, national, regional and local economic and political conditions; demographic changes; changes in competition (including new competition in former Caldor locations opened in Fall 1999 or expected to open in Spring 2000); unfavorable changes in interest rates; Year 2000 issues; unfavorable weather conditions; loss of significant vendors; availability of adequate overseas transportation; liability and other claims asserted against us; fluctuations in operating results; increased costs of key resources; continued acceptance of merchandising and marketing initiatives; changes in consumer spending and shopping habits; availability of new store sites; changes in import duties, tariffs and quotas; changes in business strategy; the ability to negotiate mutually acceptable collective bargaining agreements; the ability to attract and retain qualified personnel; and those risks and uncertainties contained under the heading "Risk Factors" beginning on page 8 of the Company's Registration Statement on Form S-1, as amended from time to time, as filed with the SEC. Since fresh-start reporting has been reflected in the accompanying condensed financial statements (Note 2) as of October 30, 1999 and for Third Quarter and Year-to-Date 1999, those statements are not comparable in certain material respects to the condensed consolidated financial statements as of October 31, 1998 and for Third Quarter and Year-to-Date 1998. Accordingly, a black line has been drawn between the Registrant's financial statements and the Predecessor's financial statements. We have attempted to indicate, where feasible, the major effects on comparability from fresh-start reporting in the following discussion and analysis of financial condition and results of operations for Third Quarter and Year-to-Date 1999. THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 Total sales for Third Quarter 1999 increased $35.3 million or 10.9% from Third Quarter 1998 due primarily to an increase of 10.5% in comparable store sales (including leased shoe department sales). In addition, two new stores were opened in October, 1999. We believe that the increase in comparable store sales was due mostly to continued favorable customer response to our merchandising and marketing initiatives and the first-quarter liquidation of one of our major competitors (Caldor Corp.). Over the last two years, we have lowered opening price points, developed more item-intensive and price-point oriented circular ad offerings, introduced certain convenience and commodity products, and implemented and expanded two successful programs: "Certified Value" (highlights highly recognizable items at competitive everyday prices) and "WOW" (integrates targeted and mostly unadvertised opportunistic purchases). We had strong sales of both hardlines and softlines merchandise in Third Quarter 1999, with hardlines merchandise experiencing the larger increase. Comparable store sales increased 4.9% during the fiscal month of November, 1999, which had unseasonably warm weather that negatively impacted sales. The Company also discontinued one seasonal promotional event in November, 1999 as compared to November, 1998. Gross margin increased $11.1 million in Third Quarter 1999 compared to Third Quarter 1998 due to the higher sales and a slightly higher gross margin rate (30.5% vs. 30.4%). Leased department and other operating income increased $0.2 million but remained the same as a percentage of net sales in Third Quarter 1999 compared to Third Quarter 1998. Selling, store operating, administrative and distribution ("SG&A") expenses increased $6.0 million but dropped 1.4% as a percentage of net sales (due to the improved sales performance) in Third Quarter 1999 from Third Quarter 1998. The higher SG&A expenses were primarily due to store and distribution expenses associated with staffing requirements to handle the higher sales volume and satisfy customer demand and a $1.3 million credit in the Third Quarter 1998 benefits expense that resulted from a reduction in retiree medical benefits (Note 8). In addition, preopening expenses of $1.2 million were incurred in Third Quarter 1999 for the two new stores. Depreciation and amortization expense declined $1.2 million or 0.6% as a percentage of net sales in Third Quarter 1999 from Third Quarter 1998 due primarily to the impact of fresh-start reporting. Interest and debt expense increased $3.4 million or 0.9% as a percentage of net sales in Third Quarter 1999 from Third Quarter 1998. This increase was due to $2.3 million of noncash interest expense resulting from the amortization of the discount associated with the unfavorable lease liability recorded under fresh-start reporting, interest of $0.6 million on the Lease Financing Obligation (Note 4) and interest of $0.4 million on the new notes issued under the plan of reorganization. The reorganization credit of $2.8 million in Third Quarter 1998 was directly associated with the Chapter 11 proceedings and is discussed in Note 6. We did not record an income tax provision in Third Quarter 1999 due to the current expectation of no income tax expense or benefit in 1999. There was also no income tax expense or benefit recorded in Third Quarter 1998. YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998 Year-to-Date 1999 total sales increased $126.0 million or 13.4% from Year-to-Date 1998 due to this year's 14.2% increase in comparable store sales and the two new stores opened in October, partially offset by the impact from the closing of five stores in the first quarter of 1998 and one store in the first quarter of 1999. We believe that the Year-to-Date 1999 increase in comparable store sales was due primarily to the same factors discussed above for Third Quarter 1999. We had strong increases in Year-to-Date 1999 sales of both hardlines and softlines merchandise, with hardlines merchandise experiencing the larger increase. Gross margin increased $41.5 million in Year-to-Date 1999 compared to Year-to-Date 1998 due primarily to the higher sales and a higher gross margin rate (30.3% vs. 29.9%). The improved year-to-date gross margin rate was principally the result of a lower markdown rate which related, in part, to the strong sales performance. Leased department and other operating income increased $0.7 million due mostly to improved leased shoe department sales but stayed the same as a percentage of net sales due to the strong overall sales growth (which exceeded the leased department sales growth). Year-to-Date 1999 SG&A expenses increased $26.7 million but dropped 1.1% as a percentage of net sales (due to the improved sales performance) from Year-to-Date 1998. The higher SG&A expenses were primarily due to the incremental expenses incurred to handle the higher sales volume as discussed above for Third Quarter 1999 and a $4.0 million credit in the Year-to-Date 1998 benefits expense that resulted from a reduction in retiree medical benefits (Note 8). Depreciation and amortization expense declined $3.3 million or 0.7% as a percentage of net sales in Year-to-Date 1999 from Year-to-Date 1998 due primarily to the impact of fresh-start reporting. Interest and debt expense increased $9.8 million or 0.8% as a percentage of net sales in Year-to-Date 1999 from Year-to-Date 1998. This increase was due primarily to $7.0 million of noncash interest expense resulting from the amortization of the discount associated with the unfavorable lease liability recorded under fresh-start reporting and interest of $1.9 million on the new notes issued under the plan of reorganization. Reorganization credits of $0.8 and $2.6 million in Year-to-Date 1999 and 1998, respectively, were directly associated with the Chapter 11 proceedings and are discussed in Note 6. We did not record an income tax provision in Year-to-Date 1999 due to the current expectation of no income tax expense or benefit in 1999. There was also no income tax expense or benefit recorded in Year-to-Date 1998. LIQUIDITY AND CAPITAL RESOURCES We had outstanding borrowings of $158.2 million at October 30, 1999, exclusive of the issuance of letters of credit, under our $270 million Revolver (Note 4) compared to outstanding borrowings of $157.4 million at October 31, 1998, exclusive of the issuance of letters of credit, under the DIP Facility (Note 4). Peak and average Revolver borrowings were $165 and $132 million, respectively, in Year-to-Date 1999 compared to $162 and $116 million under the DIP Facility, respectively, in Year-to-Date 1998. The associated weighted average interest rate in Year-to-Date 1999 (7.44%) declined from the same prior-year period (7.93%). The increase in average borrowings since the end of Third Quarter 1998 related primarily to reorganization expenses paid since that period. The amount available to borrow in the fourth quarter of 1999 is currently expected to peak at approximately $270 million in November, 1999 and average approximately $235 million. We currently expect borrowings under the Revolver in the fourth quarter to peak at $172 million in November, 1999 and average approximately $140 million, while total outstanding letters of credit under the Revolver are expected to peak at approximately $32 million in January, 2000 and average approximately $30 million. Other than payments made to certain pre-petition creditors approved by the Bankruptcy Court (Note 2), payments on indebtedness, exclusive of certain capital lease obligations, incurred prior to the Filing were not made until after consummation of our plan of reorganization. Virtually all of our pre-petition indebtedness was subject to settlement under the reorganization case. In Year-to-Date 1999, cash used by operations before reorganization items was $12.7 million, compared to $48.8 million of cash used by operations before reorganization items in Year-to-Date 1998. This improvement in year-to-date cash from operating activities was due primarily to the improvement in operating results and improved vendor payment terms. Net cash used by reorganization items in Year-to-Date 1999 of $9.9 million was comprised of Chapter 11-related professional fee payments of $8.1 million and store closing and severance costs of $1.8 million. Inventories at October 30, 1999 increased $4.6 million from October 31, 1998, due primarily to the two new stores and increased $91.2 million from January 30, 1999 due primarily to a normal seasonal build-up. Accounts payable at October 30, 1999, increased $21.7 million from October 31, 1998 due to improved vendor payment terms and a higher level of merchandise purchases and increased $81.8 million from January 30, 1999 due to the associated normal seasonal build-up of inventories, a higher level of merchandise purchases and improved vendor payment terms. Accrued expenses were $3.6 million lower than at October 31, 1998 due primarily to this year's discontinuance of accruals for Chapter 11 professional fees. Accrued expenses at October 30, 1999 were $9.7 million lower than at January 30, 1999 due principally to payments made against reserves established prior to 1999 for Chapter 11 professional fees and employee severance and termination benefits and store closing costs. We incurred capital expenditures, excluding lease acquisition costs of $1.3 million for two former Caldor stores opened in October, 1999, of $17.1 million in Year-to-Date 1999 (compared to $10.4 million in Year-to-Date 1998), primarily for a warehouse management system (which was implemented in August, 1999 in our Edison, NJ distribution center), remodeling of the two new stores and various other store and distribution center improvements. For all of 1999, we expect total capital expenditures (including the lease acquisition costs) to be approximately $25 million, which is an allowed amount under an amendment to our Revolver obtained in September. These 1999 capital expenditures are primarily for the warehouse management system and other management information systems, remodeling of three new stores (including an additional former Caldor store on Staten Island, NY to be opened in April, 2000 under an operating lease) and various other store and distribution center improvements. We currently expect to finance these expenditures through internally-generated funds. We believe that the availability under our Revolver, together with our available cash and expected cash flows from 1999 operations and beyond, will enable us to fund our expected needs for working capital, capital expenditures and debt service requirements. We expect to utilize internally generated funds and/or funds available under the Revolver in December, subject to minimum availability requirements, to prepay certain of the Notes (Note 4) currently remaining outstanding. An extraordinary gain of approximately $1 million is expected to be recorded at the time of the prepayment. Our ability to meet our financial obligations, make planned capital expenditures and implement our strategic initiatives will depend on our future operating performance, which will be subject to financial, competitive, economic and other factors affecting the industry and our operations, including factors beyond our control. Further improvements in operating profitability and achievement of expected cash flows from operations are necessary to provide adequate liquidity and are dependent upon our attainment of comparable store sales increases, along with gross margin and expense levels that are reasonably consistent with our financial plans. YEAR 2000 READINESS DISCLOSURE The Year 2000 project is virtually complete and the cost of remediation totaled approximately $4.1 million, including $1.7 million incurred in Year-to-Date 1999 that was included in SG&A expenses. All software replacement or remediation was virtually complete as of the end of Third Quarter 1999. Successful tests have been performed of all major systems. In 1998, to address compliance of our information technology systems, we contracted with a major outside consulting firm to provide the resources required to identify Year 2000 issues and remediate our systems as necessary. In some cases, non-compliant software has been replaced through upgrades provided by manufacturers of the respective software or by installation of compliant replacement systems. We also addressed embedded systems and computer-controlled devices in our stores, distribution centers and central office and we are taking the necessary steps to ensure Year 2000 compliance. As of October, 1999, the Year 2000 project was approximately 99% complete, excluding the third-party compliance evaluation discussed below. We believe that the critical systems we operate are now substantially Year 2000 compliant and that we are not likely to encounter significant internal operational problems. However, there is no guarantee that a Year 2000 related failure will not arise. This is due to the uncertainty surrounding potential third-party related Year 2000 problems, as well as our potential failure to discover all of our own susceptible internal systems. The risk to us resulting from the failure of third-party or internal systems is similar to other retailers and, for the most part, to other businesses. We took steps to minimize this risk by surveying our suppliers and business partners to assess their Year 2000 readiness, and their responses are being analyzed for any necessary action. A reasonable worst case scenario could involve the failure of our systems or our supplier and business partner systems which would cause a material disruption to our operations. For example, this could result in an interruption of certain normal business activities and operations such as a temporary inability to process sales transactions or transmit data either internally or to suppliers and business partners. If the worst case scenario should occur for any significant duration, it could have a material adverse impact on our business, results of operations, liquidity and financial position. However, at this time, we are unable to determine completely the financial consequences of such potential Year 2000 failures. While we expect our efforts will provide reasonable assurance that material disruptions will not occur, the potential for disruptions cannot be fully identified. We therefore have developed contingency plans that will provide for alternative courses of action to mitigate material individual system or process failures due to Year 2000 issues. At this time, we cannot estimate the additional cost, if any, that might be incurred from the implementation of such contingency plans. The costs of the Year 2000 project and the dates on which we plan to complete Year 2000 modifications are based on our best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risk associated with our financial instruments. We are exposed to such market risk from changes in interest rates which may adversely affect our financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. We do not use financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments. We are exposed to interest rate risk primarily through our borrowings under our $270 million post-emergence financing facility (Note 4). Under the facility, we may borrow funds under the $250 million senior secured tranche at variable interest rates based on (a) the higher of (i) the annual rate of interest as announced by BankBoston as its "Base Rate" and (ii) the weighted average of the rates on overnight federal funds plus 0.50% per annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus the percentage established by the Federal Reserve as the maximum rate for all reserves applicable to any member bank of the Federal Reserve system in respect of eurocurrency liabilities. Each of these rates is subject to a 0.50% increase in the event of overadvances. The $20 million junior secured facility permits us to borrow funds at the "Base Rate" plus 7.00% per annum. BRADLEES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. - Exhibits and Reports on Form 8-K (a)Index to Exhibits Exhibit No. Exhibit Page No. ----------- ------- ------- 10 Second Amendment to Credit Agreement 27 dated as of September 22, 1999, among reorganized Bradlees Stores, Inc., reorganized Bradlees, Inc. and BankBoston, N.A., as Agent. 15 Letter re: unaudited interim 36 financial information. (b) Reports on Form 8-K The following report on Form 8-K was filed during the quarterly period ended October 30, 1999: Date of Report Date of Filing Item Number Description -------------- -------------- ----------- ----------- August 20, 1999 August 20, 1999 5 Disclosure of second quarter 1999 results compared to plan. BRADLEES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRADLEES, INC. Date: December 13, 1999 By /s/ PETER THORNER Peter Thorner Chairman and Chief Executive Officer Date: December 13, 1999 By /s/ CORNELIUS F. MOSES III Cornelius F. Moses III Senior Vice President, Chief Financial Officer EXHIBIT 10 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT (this "Amendment"), dated as of September 22, 1999, among reorganized BRADLEES STORES, INC., a Massachusetts corporation (the "Borrower"), reorganized BRADLEES, INC., a Massachusetts corporation ("BI"), and each of the other guarantors listed in Schedule 3.04 to the Credit Agreement (as defined below) (together with BI, each a "Guarantor" and collectively, the "Guarantors"), and the Lenders party to the Credit Agreement referred to below. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. W I T N E S S E T H WHEREAS, the Borrower, BI, the Guarantors, the financial institutions party to the Credit Agreement as lenders (the "Lenders"), BankBoston, N.A., as issuer of Letters of Credit, as administrative agent (the "Administrative Agent"), and as agent for the Tranche B Lenders, BankBoston Retail Finance, Inc., as collateral agent (the "Collateral Agent"), and the CIT Group/Business Credit, Inc. and Congress Financial Corporation (New England), each as co-agents, are parties to that certain Revolving Credit and Guaranty Agreement, dated as of February 2, 1999, as amended by that certain First Amendment to Credit Agreement, dated as of March 24, 1999 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders agree to certain amendments to the Credit Agreement as more fully set forth below; and WHEREAS, subject to the terms and conditions set forth below, the Lenders are willing to agree to such amendments. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Amendments. ---------- (a) Section 5.17 of the Credit Agreement is amended by deleting "$6,000" in the sixth line thereof and replacing it with "$9,000". (b) Section 6.04 of the Credit Agreement is amended by (i) deleting "$20,000,000" wherever it appears therein and replacing it with "$25,000,000" and (ii) inserting the following text at the end of such Section: "Notwithstanding the foregoing, to the extent BI receives any cash proceeds (the "Equity Proceeds") from the issuance (the "Equity Issuance") by BI of any of its equity securities in a transaction not otherwise prohibited under this Credit Agreement, the Equity Proceeds may be used by the Credit Parties for Capital Expenditures without counting such Capital Expenditures against the dollar limits set forth in the immediately preceding sentence; provided that, (i) the Administrative Agent shall have received fully executed copies of all instruments, agreements and other documents which relate to such Equity Issuance (excluding copies of the certificates representing the securities so issued, other than a specimen thereof), (ii) as required by the Loan Documents, pending any expenditure of such Equity Proceeds permitted under this Credit Agreement, all Equity Proceeds are held by the Collateral Agent as Collateral for the Obligations pursuant to documentation reasonably satisfactory to the Collateral Agent, (iii) at the end of each month in which any Capital Expenditures are made from such Equity Proceeds, the Administrative Agent receives from the Borrower a written statement of the amount of such Capital Expenditures made during such month and a certification from an officer of the Borrower that such expenditures were for Capital Expenditures, and (iv) during the period that any Equity Proceeds are being held by the Collateral Agent as provided above, to the extent that the Borrower or any other Credit Party makes any expenditure that, historically, is outside of the Borrower's or such Credit Party's ordinary course of business (as reasonably determined by the Administrative Agent) that is not a Capital Expenditure, the full amount of such expenditure shall be deducted from the amount of such Equity Proceeds that may be utilized for Capital Expenditures in excess of the amounts set forth in the immediately preceding sentence." (c) The definition of "Change of Control" set forth in Section 1.01 of the Credit Agreement is hereby amended as follows: (i) The parenthetical phrases "(other than Gabriel and Elliott and their respective Affiliates)" and "(or, in the case only of direct purchasers from Gabriel or Elliott of shares of voting securities of BI owned by Gabriel or Elliott on the Plan Effective Date, 50%)" are hereby deleted; and (ii) Effective after the election of members of the Board of Directors of BI at BI's regular shareholders meeting in calendar year 2000, the term "Plan Effective Date" in clause (b) thereof shall be replaced with the term "2000 Meeting Date". (d) The following definition shall be added to the Credit Agreement in proper alphabetical sequence: ""2000 Meeting Date" shall mean the date of BI's - -------------------- regular shareholders meeting in calendar year 2000." 2. Conditions Precedent. The amendments contained in Sections -------------------- 1 and 2 above are subject to, and contingent upon, the prior satisfaction of each of the following conditions: (a) the Administrative Agent shall have received duly executed counterparts hereof signed by the Credit Parties and the Required Lenders; (b) all representations and warranties of the Credit Parties contained herein shall be true and correct in all material respects as of the date of this Amendment; and (c) in consideration for the amendments contained in Sections 1(a) and 1(b) above, the Borrower shall have paid to the Administrative Agent in immediately available funds, for the ratable benefit of the Lenders executing this Amendment, a nonrefundable amendment fee of $135,000. 3.Representations and Warranties. The Credit Parties hereby -------------------------------- represent and warrant to the Lenders as follows: (a) As of the date hereof, the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects after giving effect to this Amendment as though made on and as of such date, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and correct on and as of such earlier date); (b) after giving effect to this Amendment, no event has occurred and is continuing which constitutes an Event of Default or an Event of Super-Default; (c) each of the Credit Parties has the corporate power and authority to execute, deliver and perform the terms and provisions of this Amendment and the transactions contemplated hereby, and has taken or caused to be taken all necessary actions to authorize the execution, delivery and performance of this Amendment and the performance of the transactions contemplated hereby; (d) except for those that have been obtained, no consent of any other Person and no action of or filing with any Governmental Authority is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment and the performance of the transactions contemplated hereby; (e) this Amendment has been duly executed and delivered on behalf of each of the Credit Parties and constitutes the legal, valid and binding obligation of each Credit Party, enforceable in accordance with its terms; and (f) the execution, delivery and performance of this Amendment will not violate any law, statute or regulation, or any order or decree of any Governmental Authority, or conflict with, or result in the breach of, or constitute a default under, any material contract by which any Credit Party is bound or the articles of incorporation or bylaws of any Credit Party. 4. Effect of Amendment. Except as specifically provided herein, this Amendment does not in any way affect or impair the terms, conditions and other provisions of the Credit Agreement or the other Loan Documents, and all such terms, conditions and other provisions of such documents shall remain in full force and effect. The amendments contained herein are limited to the specific provisions and circumstances described and shall not be deemed to (i) be a waiver or amendment of any other term or condition of the Credit Agreement or any other Loan Document or (ii) prejudice any rights not specifically addressed herein which the Administrative Agent, the Collateral Agent or any Lender may now have or may have in the future under the Credit Agreement or any other Loan Document. 5. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 6. Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction for any reason shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. If this Amendment is deemed invalid or unenforceable with respect to any Credit Party which is a party hereto, this Amendment shall remain valid and enforceable with respect to all other Credit Parties party hereto. 7. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF. 8. Headings. Section headings are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and the year first above written. BRADLEES STORES, INC., as Borrower By: /s/PAUL R. MCKELVEY Name: Paul R. McKelvey Title: Vice President - Treasurer GUARANTORS: BRADLEES, INC., as a Guarantor By: /s/PAUL R. MCKELVEY Name: Paul R. McKelvey Title: Vice President - Treasurer NEW HORIZONS OF YONKERS, INC., as a Guarantor By: /s/PAUL R. MCKELVEY Name: Paul R. McKelvey Title: Vice President - Treasurer LENDERS: BANKBOSTON, N.A., as a Lender By: /s/FRANCIS O'CONNOR Name: Francis O'Connor Title: Vice President Address:100 Federal Street, 9th Floor Boston, MA 02110 BANKBOSTON, N.A., as a Lender By: /s/ROBERT DEANGELIS Name: Robert DeAngelis Title: Senior Vice President FINOVA CAPITAL CORPORATION as a Lender By: /s/JASON S. ITO Name: Jason S. Ito Title:Authorized Signer FIRSTRUST BANK as a Lender By: /s/BRYAN T. DENNEY Name: Bryan T. Denney Title: Vice President FOOTHILL CAPITAL CORPORATION as a Lender By: /s/TODD R. NAKAMOTO Name: Todd R. Nakamoto Title: Vice President FREMONT FINANCIAL CORPORATION as a Lender By: /s/RUTH YANG Name: Ruth Yang Title: Authorized Signer GENERAL ELECTRIC CAPITAL CORPORATION as a Lender By: /s/CHARLES D. CHIODO Name: Charles D. Chiodo Title: Authorized Signature LASALLE BUSINESS CREDIT, INC., as a Lender By: /s/WILLIAM A. STAPEL Name: William A. Stapel Title: F. V. P. NATIONAL CITY COMMERCIAL FINANCE, INC., as a Lender By: /s/PAUL H. WEYBRECHT Name: Paul H. Weybrecht Title: Vice President THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: /s/JAMES CONHEENEY Name: James Conheeney Title: Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY as a Lender By: /s/MICHAEL J. WILLIAMS Name: Michael J. Williams Title: Vice President RECEIPT ACKNOWLEDGED: BANKBOSTON, N.A., as Administrative Agent, as Tranche B. Agent, and as Issuing Bank By: /s/ROBERT DEANGELIS Name: Robert DeAngelis Title: Senior Vice President BANKBOSTON RETAIL FINANCE, INC., By: /s/ROBERT DEANGELIS Name: Robert De Angelis Title: Senior Vice President Exhibit 15 December 13, 1999 Bradlees, Inc. One Bradlees Circle Braintree, Massachusetts 02184 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Bradlees, Inc., and subsidiaries for the 13-week and 39-week periods ended October 30, 1999 and October 31, 1998 as indicated in our report dated November 17, 1999, which included an explanatory paragraph relating to the Company's emergence from bankruptcy on February 2, 1999, and adoption of "fresh-start reporting." Because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended October 30, 1999, is incorporated by reference in Registration Statement No. 333-77555. We also are aware that the aforementioned report, pursuant to Rule 436 (c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ARTHUR ANDERSEN LLP EX-27 2
5 1000 9-MOS JAN-29-2000 OCT-30-1999 11228 0 11895 0 323495 357836 116261 0 553737 387214 0 0 0 100 28433 553737 1029699 1039794 717247 717247 327912 0 21819 (27184) 0 (27184) 0 0 0 (27184) (2.73) (2.73)
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